Aflac - Earnings Call - Q2 2025

Executive Summary

• Adjusted EPS of $1.78 beat Wall Street consensus $1.706; GAAP diluted EPS was $1.11. Total revenues were $4.16B, slightly below consensus $4.32B due to net investment losses; adjusted earnings were $957M, down 7.5% YoY, with FX a $0.04 tailwind. EPS and revenue estimates from S&P Global: see asterisked values and disclaimer.
• Segment performance: U.S. pretax margin remained strong at 22.5% on 3.4% net earned premium growth, while Japan pretax margin was 32.0% with strong Miraito cancer sales (+23.2% YoY) offset by lower adjusted NII and higher expenses.
• Capital actions: $829M repurchases in Q2; Board later expanded authorization by up to 100M shares (total ~130.9M available), reinforcing shareholder return capacity.
• Management highlighted resilient underwriting and improved distribution/product execution (Miraito, Tsumitasu), pre-funded yen debt, and very strong solvency (ESR >240% vs target 170–230) as key supports. No material sales impact from the June cyber incident.

What Went Well and What Went Wrong

What Went Well

• EPS beat and margin resilience: Adjusted EPS $1.78, aided by FX (+$0.04), with U.S. pretax margin 22.5% and Japan 32.0% despite lower investment income.
• Product momentum in Japan: Miraito cancer product drove 23.2% YoY sales growth (¥20.7B), with flexible coverage and support services; management expects sustained strength, including across channels (Japan Post).
• Capital strength and deployment: $829M buybacks in Q2; pre-funded ~¥150B (~$1B) yen debt, lifting holdco liquidity to ~$5.1B; solvency metrics strong (SMR >900%, ESR >240%).

What Went Wrong

• Investment headwinds: Net investment losses ($421M) versus gains a year ago drove revenue shortfall; variable investment income ran $35M below long-term expectations.
• Japan adjusted NII down and higher expenses: Adjusted NII fell 10.5% in yen terms; Japan expense ratio elevated (20.6%), driven by tech investments; pretax margin down ~330 bps YoY.
• U.S. benefit ratio uptick: U.S. benefit/premium ratio rose to 47.3% (+60 bps YoY) on mix, partly offset by expense ratio improvement; growth initiatives still adding ~70 bps to U.S. expenses until scale is reached.

Transcript

Speaker 6

Good day, and welcome to the Aflac Incorporated second quarter 2025 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's remarks, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchstone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to David Young. Please go ahead.

Speaker 4

Good morning and welcome. Thank you for joining us for Aflac Incorporated's second quarter 2025 earnings call. This morning, Dan Amos, Chairman, CEO of Aflac Incorporated, will provide an overview of our results and operations in Japan and the U.S. Max Brodén, Senior Executive Vice President and CFO of Aflac Incorporated, will provide more detail on our financial results for the quarter, current capital, and liquidity. These topics are also addressed in the materials we posted with our earnings release, financial supplement, and quarterly CFO update on our investors.aflac.com. For Q&A today, we are joined by Virgil Miller, President of Aflac Incorporated and Aflac U.S., Charles Lake, Chairman and Representative Director, President of Aflac International, Masatoshi Koide, President and Representative Director, Aflac Life Insurance Japan, and Brad Dyslin, Global Chief Investment Officer, President of Aflac Global Investments.

Before we begin, some statements in this teleconference are forward-looking within the meaning of federal securities laws. Although we believe these statements are reasonable, we can give no assurance that they will prove to be accurate because they are prospective in nature. Actual results could differ materially from those we discuss today. We encourage you to look at our annual report on Form 10-K for some of the various risk factors that could materially impact our results. As I mentioned earlier, the earnings release with reconciliations of certain non-U.S. GAAP measures and related earnings materials are available on investors.aflac.com. I'll now hand the call over to Dan. Dan?

Speaker 1

Thank you, David, and good morning, everyone. We're glad you joined us. Aflac Incorporated reported net earnings per diluted share of $1.11 and adjusted earnings per diluted share of $1.78 for the second quarter of 2025. We believe that these are solid results for the quarter, leading to a very good first half of the year. Max will expand upon these results in a moment, but before he does, I'd like to comment on our operations. Beginning with Aflac Japan, I am very pleased with Aflac Japan's 23.2% year-over-year sales increase, especially the 53% increase in the cancer insurance sales. These strong sales were driven largely, as expected, by sales of our newest cancer insurance product, Miraito. They include the final stage of the launch of Japan Post Insurance and Japan Post in April. We also saw positive overall sales growth across all distribution channels.

This positive result also reflects our new marketing and sales structure in Japan that integrates members of the actuarial, IT, and policy service into agile teams focused on bringing a specific product line to the market, like cancer, medical, asset formation, and nursing care. We also continue to introduce the need for the third sector protection to new and younger customers with our innovative first sector product, Tsumitaz, which has third sector optional benefits. Overall, I believe we have the right strategy to meet our customers' financial protection needs throughout their different life stages. Our ability to maintain strong premium persistency is a testament to our strategy, Aflac's reputation, and our customer recognition of the value of our products. By maintaining this level of persistency and adding new premium through sales, we are partially offsetting the impact of reinsurance and policies reaching paid-up status.

Maintaining strong persistency will be vital to the future of Aflac Japan. Being where customers want to buy insurance has always been an important element of our growth strategy in Japan. Our broad network of distribution channels, including agencies, alliance partners, and banks, continually optimize opportunities to help provide financial protection to Japanese consumers. We will continue to work hard to support each channel as we evolve to meet the customers' changing needs. Turning to Aflac U.S., we generated $340 million in new sales during the second quarter, which was a 2.7% year-over-year increase. More importantly, we maintained strong premium persistency of 79.2% and increased net earned premium of 3.4%. We continue to see momentum within all areas of our group business, especially our group life and disability, as well as our network dental.

In addition, we believe our efforts to drive more profitable growth with a stronger underwriting discipline have contributed to our strong premium persistency and net earned premium growth. At the same time, Aflac U.S. has continued its prudent approach to expense management and maintaining a strong pre-tax margin, as Max will expand upon in a moment. In both Japan and the U.S., I believe the consumers need the products and solutions Aflac offers more than ever. For our policyholders who've become claimants, Aflac is more than an insurance company. We are a partner in health, a supporter of families during their times of need, and a pioneer and leader in the industry. We are leveraging every opportunity to convey our products can help fill the gap during challenging times, providing not just financial assistance, but also compassion and care.

At the same time, we continue to generate strong capital and cash flows while maintaining our commitment to prudent liquidity and capital management. We have been very pleased with our investments, which have continued to produce solid net investment income. As an insurance company, our primary responsibility is to fulfill the promises we make to the policyholders while being responsive to the needs of our shareholders. Our solid portfolio supports our promise to the policyholders, as does our commitment to maintaining strong capital ratios. We balance this financial strength and tactical capital deployment. I am happy with how management has handled capital deployment and liquidity. In the second quarter, Aflac Incorporated deployed $829 million in capital to repurchase 7.9 million shares of our stock and paid dividends of $312 million. Combined with dividends, that means that we delivered $1.1 billion back to the shareholders in the second quarter of 2025.

Additionally, we treasure our track record of 42 consecutive years of dividend growth. At the same time, we have maintained our position among companies with the highest return on capital and the lowest cost of capital in the industry. 2025 marks three important milestones for Aflac. In June, we just celebrated the 30th anniversary of what is now known as the Aflac Cancer and Blood Disorders Center of Children's Healthcare of Atlanta. We look forward to celebrating the 70th anniversary of the company's founding in November, and we also are celebrating the 25th anniversary of the Aflac duck this year. Even though these milestones are noteworthy, it's not the number of years that matters most. It's the privilege of benefiting the lives of millions of people. We are reminded that one thing has not changed since the founding in 1955.

Families and individuals still seek to protect themselves from financial hardship that not even the best healthcare insurance can cover. Today's complex healthcare environment has produced incredible medical advancements that have come with incredible costs. It's more important than ever for people to have a partner in their time of need. We believe our approach to offering relevant products makes us that partner. We also believe in the underlying strengths of our business and our potential for continued growth in Japan and the U.S., two of the largest life insurance markets in the world. On an ongoing basis, we are taking actions to reinforce our leading position and building on our momentum. I'll now turn the program over to Max to cover more details of the financial results. Max?

Speaker 2

Thank you, Dan. I will now provide a financial update on Aflac Incorporated's results. For the second quarter of 2025, adjusted earnings per diluted share decreased 2.7% year-over-year to $1.78, with a $0.04 positive impact from FX in the quarter. In this quarter, reinvestment gains on reserves totaled $37 million, reducing benefits. Variable investment income ran at $35 million below our long-term return expectations, while call income generated $35 million. Adjusted book value per share, excluding foreign currency remeasurement, increased 5.2%. The adjusted ROE was 13.7% and 16.4%, excluding foreign currency remeasurement, an acceptable spread to our cost of capital. Overall, we view these results in the quarter as solid. Starting with our Japan segment, net earned premiums for the quarter declined 4.8%. Aflac Japan's underlying earned premiums, which excludes the impact of deferred profit liability, paid-up policies, and reinsurance, declined 1.1%.

We believe this metric better provides insight into our long-term premium trends. Japan's total benefit ratio came in at 66.5% for the quarter, down 40 basis points year-over-year. The third sector benefit ratio was 57.4% for the quarter, also down approximately 40 basis points year-over-year. We estimate the impact from remeasurement gains to be 83 basis points favorable to the benefit ratio in Q2 2025. Long-term experience trends, as they relate to treatments of cancer and hospitalization, continue to be in place, leading to continued favorable underwriting experience. Persistency remained solid at 93.7%, which was up approximately 40 basis points year-over-year, in line with our expectations. Our expense ratio in Japan was 20.6% for the quarter, up 280 basis points year-over-year, driven primarily by an increase in technology expenses.

For the quarter, adjusted net investment income in yen terms was down 10.5%, primarily driven by lower floating rate income, the impact of foreign currency on U.S. dollar investments in yen terms, and lower variable investment income, somewhat offset by higher call income and higher returns on U.S. dollar fixed-rate portfolios. The pre-tax margin for Japan in the quarter was 32%, down 330 basis points year-over-year, but a very good result. Turning to U.S. results, net earned premium was up 3.4%. Persistency increased 50 basis points year-over-year to 79.2%. Our total benefit ratio came in at 47.3%, 60 basis points higher than Q2 2024, driven by business mix. We estimate that remeshment gains were in line with a year ago and favorably impacted the benefit ratio by 160 basis points in the quarter, as claims have remained below our long-term expectations.

In the quarter, we benefited from favorable underwriting on our small but growing long-term disability block. Our expense ratio in the U.S. was 36.3%, down 60 basis points year over year, primarily driven by platforms improving scale and continual focus on expense efficiency. Our growth initiatives, group life and disability, network dental and vision, and direct-to-consumer increased our total expense ratio by 70 basis points for the quarter. This is in line with our expectations, and we would expect this impact to decrease as we continue to approach scale. Adjusted net investment income in the U.S. was down 5% for the quarter, primarily driven by lower floating rate income. Profitability in the U.S. segment was very strong, with a pre-tax margin of 22.5%, a 20 basis points decline compared with a strong quarter a year ago. In our corporate segment, we recorded a pre-tax gain of $20 million.

Adjusted net investment income was $37 million higher than last year due to a combination of lower volume of tax credit investments and higher asset balances, which included the impact of the internal reinsurance transaction in Q4 of 2024. Our tax credit investments impacted the corporate net investment income line for U.S. GAAP purposes negatively by $8 million in the quarter, with an associated credit to the tax line. The net impact to our bottom line was a positive $1 million in the quarter. To date, these investments are performing well and in line with our expectations. Higher total adjusted revenues were offset by higher total benefits and adjusted expenses of $90 million, driven primarily by internal reinsurance activity, higher costs pertaining to business operations, and higher interest expense.

During the quarter, we raised debt of ¥150 billion, which translates into slightly over $1 billion to pre-fund our 2026 maturities and to create liquidity and capital flexibility at the parent company. This debt issuance, combined with a significant dividend from Aflac Japan, increased our unencumbered holding company liquidity to $5.1 billion, which is $3.4 billion above our minimum balance. Our capital position remains strong, and we ended the quarter with an SMR above 900% and an estimated regulatory ESR above 240%, following the previously mentioned dividend. While not finalized, we estimate our combined RBC to be greater than 600%. These are strong capital ratios, which we actively monitor, stress, and manage to withstand credit cycles as well as external shocks. We repurchased $829 million of our own stock and paid dividends of $312 million in Q2, offering good relative IRR on these capital deployments.

We will continue to be flexible and tactical in how we manage the balance sheet and deploy capital in order to drive strong risk-adjusted ROE, with a meaningful spread to our cost of capital. During the quarter, we increased our CISL reserves associated with our commercial real estate portfolio by $33 million net of charge-offs, as property values remain at this risk valuations. We also foreclosed on three loans, adding them to our real estate-owned portfolio, consistent with our strategy for maximizing recovery values. Our portfolio of first lien senior secured middle market loans continued to perform well, with decreased CISL reserves of $23 million in the quarter net of charge-offs. For U.S. statutory, we recorded a $7 million valuation allowance on mortgage loans as an unrealized loss during the quarter.

On a Japan FSA basis, there were no security impairments in Q2, but we did book a net realized gain of 17 million yen related to transitional real estate loans. This is well within our expectations and has a limited impact on regulatory earnings and capital. Our leverage was 22.5% for the quarter, which is within our target range of 20% to 25%. As we hold approximately 65% of our debt in yen, this leverage ratio is impacted by moves in the yen dollar exchange rate. This is intentional and part of our enterprise hedging program, protecting the economic value of Aflac Japan in U.S. dollar terms. I would like to reiterate our approach to managing foreign currency exposure. Fundamentally, we size our unhedged U.S. dollar exposure to the estimated economic surplus associated with our Japanese business. At the end of Q2, we held $27.1 billion of U.S.

dollar assets in our Japan general account, forward contracts at Inc. with a notional balance of $1.9 billion and $5.7 billion of yen-denominated debt. We also hold $25 billion notional of out-of-the-money put options, which provide tail protection against a large appreciation in the yen. Adding this up, we feel we are very well positioned on an economic basis. Thank you. I will now turn the call over to David.

Speaker 4

Thank you, Max. Before we begin our Q&A, we ask that you please limit yourself to one initial question and a related follow-up. You may then rejoin the queue to ask additional questions. We'll now take the first question.

Speaker 6

As a reminder, to ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Ryan Krueger from KBW. Please go ahead.

Hey, thanks. Good morning. My first question was on cancer sales. You obviously had a really nice pickup following the launch of the Miraito cancer insurance product. My question is more on how long you think the benefit from the new product could have on sales, and you know, understanding that you tend to get the biggest benefit initially, but you know, do you think you'll continue to see stronger cancer sales for the balance of the year because of the new product launch?

Speaker 5

はい、こんにちは。

ありがとうございます。

えっと、ヨシズミです。えー、私からお答えします。ご質問ありがとうございます。

Thank you for your question. This is Koichiro Yoshizumi. Let me answer.

えー、非常に手応えを感じております。

We are feeling it. The product has got the traction, and it is doing very well so far.

えー、元々このミライトは、あー、多くのお客様のニーズに応えて、競争優位性を保っている商品です。

Miraito is responding to diverse customers and maintaining a high competitiveness.

一番大きな特徴は、その保証の設計の柔軟性になります。

The biggest feature of Miraito is its flexible protection design.

一般的な他社が持っているがん保険というのは、要するに、えー、すべてがもうパッケージになっていて、必要、お客様にとって必要な保証なのか、保証じゃなくても、それを一つの商品として販売してます。

Normally, the cancer reinsurance offer that other companies will generally offer is offered as one package. That means even if the policyholder is not requiring particular coverage, it is already included in what they buy.

AflacのMiraitoの場合は、必要な保証を購入できるような柔軟性を持ってます。

When it comes to Aflac's Miraito, customers can purchase only the necessary coverage. That is how flexible it is designed.

保証の充実性を図りたい人には、たくさんの保証を。

For those who are wishing to have a rich coverage, they can buy a lot of coverage.

すでに保証を持っている方には、最低限必要な保証。

For those who already have enough coverage, they can buy a minimum level of coverage.

お客様カスタマイズすることができると、これが一大特徴です。

People can purchase the policy in a customized way. That is the biggest characteristic of Miraito cancer insurance product.

さらに、これまでにAflacが持ってなかった保証も付け備えてます。

Miraito carries the coverage that was not available by Aflac in the past.

これが、あー、プロダクトの特徴になります。

That was about the product's characteristics.

それに加えて、寄り添うがん相談サポートというサポートサービス。

This product carries our supporting service, which is called Yori-So Cancer Consultation Service.

これはAflacが50年かけて培った知見、あるいは、えー、医学会との関係、これから成り立った相談サービスサポートです。

This has been developed thanks to our 50 years of expertise and the relationship with our specialists.

この相談サポート、他社にない。

This consultation support is not available outside Aflac.

これが特徴になってます。

That was another characteristic of the product.

したがって、今現在、すべてのチャネルにおいて前年比をプラスになっており、また計画値も、我々の計画値をプラスになってます。

The performance is that at all channels, we are plus year on year and also positive versus the plan.

したがって、えー、過去のがん保険商品と同等もしくはですね、それ以上の期間、好調な販売が、あー、実績が続くということを期待してます。

We anticipate this strong performance to continue for the time being and longer than that of the past cancer insurance products.

改めて申し上げたいんですけれども、非常に手応えを感じてます。

Let me reiterate once again that it has got traction and it is successful so far.

ありがとうございます。

Thank you.

Great. Yes, thank you. One separate question on Japan investment income. It seems like, even if you make the adjustments for FX and NII and make calls, there seemed to be a step up in the NII in Japan. Can you give a little bit more color on things that benefited your NII trajectory there and if you think this quarter is sustainable going forward?

Speaker 0

Sure. Thank you, Ryan. Good morning. We did have a nice, strong second quarter. It was a nice improvement over first quarter, and there were a few things that drove this. The largest contributor was our variable NII from our alternatives book. That was about half the improvement. There is a little bit of seasonality there in second quarter because of the timing of some of the marks we get on fourth quarter, comes in a little bit late in the first half of the year. We also just had better marks on the portfolio overall. There is the make call, which you mentioned. That was a nice pickup, second quarter over first quarter. The rest was a combination of things. We accelerated some deployment. We pulled forward some activity to capture attractive opportunities that we saw in the first half.

We were quite active in what we call switch trades, where we sold lower yielding JGBs and we bought current yield JGBs at the current higher yields. We also swapped into some nice credit assets to pick up yield there. In terms of the outlook for third quarter, we do think you should probably adjust for the make call, although we've had two this year. Those are the one-off items that are very difficult for us to predict with any certainty. On the variable NII, we are optimistic that we'll see a good solid second half of the year. There's a lot of reasons to be optimistic for a pickup there, but that does remain very difficult to predict Q1Q. The benefit from the acceleration in the switch trades should continue to roll through for the back half of the year.

Net-net, we think we're very well positioned for a solid third quarter.

Speaker 6

Our next question comes from Suneet Kamath from Jefferies. Please go ahead.

Thanks. Good morning. Max, I wanted to ask on ESR for a minute. One of your competitors disclosed their view that some of the companies in Japan are using sort of adjusted metrics that aren't true to the FSA's, I guess, formulas. Just wanted to get your thoughts on that and how you're approaching this ESR as you give us the disclosure every quarter. Thanks.

Speaker 0

Thank you, Suneet. I'll kick it off, and I'll also ask if Steve Beaver in Japan has any comments as well. ESR overall, you have today three versions of ESR. You have the regulatory ESR, you have the regulatory ESR with USP, and you have the internal models. We use the regulatory model with USP. The reason why is because this is what we believe that we should manage to. That gives us the opportunity to adjust the regulatory model using risk factors that are specific to our business. That means that they are more realistic on our business than the regulatory model is. Right now, that gives us roughly an uplift over the regulatory model of about 30 points.

Over time, we would hope that there will be an approval of our internal model as well, which obviously is closer to the real economics of the underlying business because there, in the internal model, we would use our full internal experience. We believe that this is the right approach and this is the right model to use.

Okay. That's helpful. Thank you. On the cancer sales, can you just talk about how much of an impact was LAPS reissue, if at all, in the quarter? Are you targeting these sales to newer customers, or are you sort of going back to your in-force customer base and selling the cancer policy? Thanks.

Let me kick it off on that, and Japan might want to give some more color. The early data that we have on LAPS reissue indicates that we are roughly in line or slightly below our internal expectations. We have not seen a spike greater than what we normally would expect when we have a refreshed product out in the marketplace as it relates to LAPS reissue. You always have a little bit of an uptick, and that is expected. So far, the data is indicating that we are in line with our expectations. There is always a little bit of a lag, though, and that means that as we go into the third quarter, we wouldn't be surprised if we see a little bit of an uptick in LAPS reissue.

Speaker 5

じゃあ、えー、ジャパンのほうから、販売の観点で。

Let me answer from the sales perspective from Japan.

これ、既契約のお客様に対しても、もちろん新規のお客様に対しても、両方です。

We are selling both to our existing customers and new customers.

えー、既契約のお客様でこれまでお持ちでなかった保証、これを追加していくっていうことがもちろんできますし。

For existing customers, we can offer additional coverage that the policyholders do not have at present.

この柔軟性を持って、新規のお客様をどんどん掘り起こしていけるというふうに考えてます。

With this flexible nature of this product, we can develop the new customer base.

この商品の一つの特徴に、このMiraitoに入っていただいたお客様、あー、に対しては、えー、こどもプランというものを非常に安い保険料で入っていただくことができます。

One of the characteristics of this Miraito cancer insurance product is the plan for children. The premiums are extremely low, and they can enroll to the service.

成人するまで、二十三歳になるまで、そのこどもプランに入っていただいて...

They can continue enrolling until the children become the age of 23.

そのまま普通のがん保険に成人したら、あー、そのまま変えることができると...

They can switch.

という特徴を持ってます。

The policy to the regular cancer insurance.

これが非常に脚光を浴びてまして。

This product is gaining a great deal of attention from customers.

若中年層のお子様をお持ちのお客様、新しいお客様がどんどん加入していってるというところ。

We are seeing new enrollment, especially from the younger and middle-aged customers.

このような特徴を生かして、さらに新規のマーケットを増やしていきたいと思ってます。

By leveraging such characteristics that I just mentioned, we anticipate expanding the new expanded business to new policyholders in the future too.

以上です。ありがとうございます。

That's all. Thank you for your question.

Speaker 6

Next question comes from Jack Matten from BMO Capital Markets. Please go ahead.

Hey, good morning. Just one on the remeshment gains that you've been continuing to see in both Japan and the U.S. I guess, given those, should we be thinking about any kind of change in your assumptions as part of the unlocking next quarter? I'm just curious, in Japan, do your assumptions assume kind of further improvement in cancer and hospitalization trends, or are you already assuming some degree of improvement, but the actual experience just continues to be even better than your expectations?

Speaker 0

Let me just remind you of our policy. Each quarter, we true up the experience in that quarter, and that will then flow through as remeasurement gain losses in that reported quarter. Obviously, in the third quarter of each year, we unlock our actuarial assumptions as it relates to our forward-looking assumptions. When we look forward, and I'm going to go back to Q3 of 2024, in our assumptions that we set back then, there is a small improvement in the forward-looking trend of hospitalization trends in Japan. It's relatively small, but it is not flat. There is a small, small improvement expected in those assumptions that we incorporated when we set those actuarial assumptions in 2024. Obviously, we will update these assumptions in the next quarter.

Got it. Makes sense. Thanks. Maybe just one on capital deployment. You're running with, I think, $3.4 billion above your target at the holding company, healthy levels of the subs too. I guess, can you just remind us where Aflac might be interested in terms of potential M&A? I don't know if it's something to accelerate growth in the U.S. group if this is a priority. Maybe after M&A, any kind of alternatives that you'd be thinking about in terms of capital deployment?

Our philosophy as it relates to capital deployment is that it is a function of the capital generation that we see from the operating companies going forward, the capital that we have at hand, and the future capital generation. We try to deploy that firsthand into our operations and grow where we can grow at good IRRs. We also use capital to extend our business, and that can be evaluating M&A. That is predominantly lately that has come through as deploying capital back to shareholders through dividends and buybacks. We believe that we have achieved very good IRRs on those capital deployment actions.

Speaker 6

The next question comes from Jimmy Bhullar from JPMorgan. Please go ahead.

Good morning. I had a question first on U.S. sales. We thought the business would be growing the last couple of years, but its sales have actually consistently been weaker than expected. I think last year you were down. This year they've been positive, but fairly sluggish, low single digits. Maybe Virgil, you could just talk about what's going on in business and general expectations for sales results over the next year or so.

Speaker 0

Thank you. Good morning, Jamie. Let me give a macro view first and just say that we're continuing to take some deliberate actions to drive long-term sustainable value. Some of this is some deliberate intentional actions where we are really looking to get the right type of business that we want on the books. You can see that when you look at our overall performance for the quarter. When you look at our earned premiums being up 3.4%, look at the persistency, we continue to move on that. It was up about 50 basis points for the quarter. Then you look at our expense ratio. Expense ratio is one of the best we've had in about five quarters in a row. I'm really looking at the overall totality. The 2.7% increase for the quarter was certainly at the low end of our range.

What I'm expecting, Jimmy, is a stronger second half really driven by fourth quarter bookings. Our pipeline looks strong. We're seeing good performance in our lab business. We have built a strong reputation there. You may have seen a press release we did recently where we are now taking over with the state of Maine for FML, PFML management, just like we're currently doing with renewal for the state of Connecticut. We're also pleased with the performance we saw with our dental property. I had mentioned before that we had some operational concerns that we have now overcome. Strong momentum, double-digit growth in the first half of the year. I expect that to continue throughout the second half, and we continue to see a bright spot with our consumer markets or the direct-to-consumer platform.

All in all, I expect to see a stronger second half driven really by fourth quarter enrollments. Our focus will be on recruiting. We've got to pick it up in our traditional business. That's driven by our career channel. I'm looking to increase. Right now, we're relatively flat for the first half of the year. I'm looking to put up some positive numbers with recruitment, convert those, and then continue to see the trend that we have a high productivity that we're getting out of our field. Overall, I hope that helps, Jamie. Just let me know if you have any more questions on that.

No. Maybe a little bit on the dental product. Has it gotten to what you'd expect to be a normal level of sales for that business, or is it still there's the catch-up related to the platform change?

Yeah. I will tell you, during the second quarter, again, because of the underperformance of last year, you have to be careful with the numbers. We were up 43%, but again, it's on a small base last year. I will tell you, we're certainly at a high range of my expectations for this year, and I'm expecting that to continue.

I think it's important, Jimmy, to note that dental and vision is part of the overall strategy we have going forward. I think it's a number you can look to that we're counting on. We think it, because it's the number one, number two choice among consumers, it's a door opener for us in the supplemental area by putting it in first. I think monitoring that will be important as we believe it is, and we're monitoring it even weekly to see how it's picking up because we're frustrated with some of the issues we had early on. That's that learning curve that you have when you get into things new. We're glad we're there. We're glad that hopefully all the major issues are behind us and that we'll just see positive growth going forward with it.

Speaker 6

Our next question comes from Elise Greenspan from Wells Fargo. Please go ahead.

Hi. Thanks. Good morning. My first question, I guess, is on the expense ratio within Japan. That's trended favorable, I guess, relative to your guide. I think expenses are somewhat typically higher in the back half. Just how are you thinking about that ratio trending from here over the course of the year?

Speaker 0

We still expect to be within our guidance range of 20% to 23% for that expense ratio. Obviously, in the first half, we are at the lower end of that range. That includes, obviously, a product refreshment marketing campaign associated with our cancer launch. As we look out into the second half, there are some continued technology projects that will continue to drive expenses higher year over year. In terms of the range of 20% to 23%, we'll probably be in the middle or lower end of that range.

Thanks. My second question goes back to capital. Obviously, elevated holdco cash right now. Is there a certain time period that you guys would look to take that down, whether that's organic, inorganic growth, as well as repurchases? How should we think about buybacks in the second half of the year? Should we think about that elevated relative to the first half, just given the higher holdco cash?

The timing of it, right now, you have a U.S. dollar yield curve that is essentially flat, which means that the so-called, if you can call it the tax of holding cash right now, is not what it used to be. We're earning a decent yield on that cash. Obviously, the yields are below our cost of equity capital, which means that over time, we would certainly expect to deploy the capital. The rush to do so is not necessarily there to the same extent that it may have been in the past when yields were much, much lower at the short end of the yield curve. I think we're in a very good spot. In fact, we did intentionally move up in terms of holding cold cash this quarter through the debt issuance that we did. This was a debt issuance that we did denominated in yen.

We had room for having more yen debt on our balance sheet. That helps with our overall foreign exchange exposure, and it also gives us a positive carry. If you think about our cost of that debt, it's about 2.30, 2.35, and we can invest in low fours in U.S. dollars right now. We actually have a positive carry on it. It made sense for us to pre-fund those debt maturities and go early. As it relates to deployment going forward, it continues to be our capital deployment process where we will look across the company and the enterprise, look for where we have opportunities to deploy capital at good IRRs that are being organically or deploying it tactically into dividends and buybacks.

Speaker 6

The next question comes from Tom Gallagher from Evercore ISI. Please go ahead.

Good morning. One on Japan sales and then a follow-up on ESR. My question is, you know, ¥21 billion sales, that's if I annualize that, we're back to pre-pandemic levels now. I don't want to get ahead of ourselves here. It was one very good quarter. Can you provide some perspective on how you're viewing this? I mean, do you think there was a big kind of one-time benefit, or do you think we might see a higher level of sales sustained here for a while? The other thing I noticed was your Tsumitaz asset formation product also held up. Normally, when you see a new product launch like the Miraito cancer insurance product, you see a fall-off of some of the other products. You do seem to, there's some sustainability in the Tsumitaz as well. Anyway, main question on all of that is, do you think it's sustainable?

If so, what does it mean for premium revenue growth? Is it a game changer, or is it too early to tell whether we might start to see a flattening out or actually improvement or growth on net earned premium in 2026, 2027 from what you're seeing right now? Thanks.

Speaker 5

ご質問ありがとうございます。あの、セールスを担当してる吉住です。

Thank you for your question. This is Koichiro Yoshizumi in charge of Sales.

えー、まずそのコロナ前のセールスのボリュームに戻るということを我々も目指してます。

Yes, we are aiming to make a recovery to the level of pre-COVID in terms of sales.

これはまず商品の観点では、今回のがん保険のMiraito,これが好調であるということ。これを引き続き全チャネルを通じて、販売している全チャネルを通じてやっていくということ。

One of the initiatives in order to further increase our sales is to focus on the Miraito cancer insurance product, which is doing very well so far. We will continue to make efforts throughout the channel.

それと、それを支えるツミタツ。

Tsumitaz, which is supporting that sales.

これも一定の販売額をキープしていけています。

Tsumitaz is also maintaining a certain level of sales.

えー、ツミタツを販売することは、第三分野を同時に販売額が伸びるということを意味してます。

The Tsumitaz being successful also means that there is a positive contribution to the third sector product.

ディストリビューターに対して、ツミタツの単品販売を推奨してません。

We are not recommending distributors to offer or sell Tsumitaz on a standalone basis.

必ず第三分野との併売を話してくるようにということで指導を育成してます。

We instruct and train them so that they will always offer, together with a third sector product, when they sell Tsumitaz asset formation product.

それが投稿して、ツミタツの数字だけではなくって、ツミタツの販売だけではなくて、第三分野の販売が今伸びている。

With that effort, not only Tsumitaz, but also the third sector sales is growing.

医療保険に関して...

Regarding the medical insurance.

え、非常に競合が激しい中で...

The competition is very intensified in this market.

なかなか期待には応えていけてない。

Medical insurance sales is yet to reach to our expected level.

しかしながら、金融庁の認可が前提にはなりますが...

However, any new product requires regulatory approval.

この一年以内に新商品、これはまたMiraitoと同じような特徴を持った商品をローンチしたいと思ってます。

We expect to launch a new medical product within a year, which will carry a similar characteristic with Miraito.

あと、チャネルの観点で。

Another point about the channel.

えー、我々の基盤となってるアソシエイツチャネル。

Our mainstay channel, Associate Channel.

非常に販売額が好調です。

Associate Channels are doing very well, and their sales are growing.

また、一昨年からアソシエイツの募集人を増強してます。

Two years ago, we started an effort to reinforce our solicitors.

昨年は1,100人。

Last year, we hired 1,100 agents.

ま、今年もそれ以上ということを目指して...

This year, we are trying to be at the same level or more.

当然、募集人の数が生産性に影響してきます。

Of course, the number of agents will have an impact to our productivity.

あと、組織です。

Regarding the organization.

今年1月に大きなマーケティング営業変革を起こしました。

In January, we have rolled out a major marketing and sales transformation.

今、新しいチーフマーケティングオフィサーを中心に...

Led by the new Chief Marketing Officer.

えー、データドリブンで。

We are working in a data-driven methodology.

全部ツーエンドの取り組みをアジャイル的にやってます。

are also conducting an end-to-end initiative with agility.

その辺を総合的に勘案すると...

drive long-term value for Aflac Incorporated and our shareholders.

ま、コロナ前にいつか到達していきたいと、早く到達していきたいとは思っています。

We expect that we reach the pre-COVID level as early as possible.

したがって、2025年のセールスに関しては、2024年をまた上回ってくると、ここは確信してます。

I am confident that the 2025 sales will exceed that of 2024.

以上です。ありがとうございます。

That's all. Thank you for your question.

If Tom, keep in mind that our forward guidance for earned premiums still remains negative 1% to negative 2% for the guidance period. Obviously, we're very encouraged by the launch of Miraito, and in Q2, we were down on earned premium by 1.1%. It's certainly pushing us towards the lower end of that range, but clearly, we still remain in negative territory.

Speaker 1

I want to say that as I've been watching Japan all these years, there was a shift, in my opinion, in marketing and sales in terms of the job that they are doing. They are doing a better job overall than they were doing a year and a half ago. They had a wake-up call when we saw the stock drop a little bit, we had some discussions about it, and things picked back up. I think, as was said just a minute ago, we had a new Director of Marketing. The Miraito cancer insurance product is different in that there are outside forces that are helping us with people and on how to deliver the product and to make sure they've got abilities to talk to people and work through processes from doctors to whatever it might be. It's just a little bit of a shift.

I don't think we know exactly how long or what, but my sense is we are better today than we have been in a long time, and we are prepared. The Miraito cancer insurance product is also doing very well for us and is bringing on younger people, which is one of the things we hoped would happen. That has been reinforced that it has helped and will continue to help. Saying that, as Max Brodén said, we are cautious about the number change because it's such a big number to move. All in all, I think we're writing better business, we're growing, and we'll just have to monitor it going forward. I give them kudos for the job that they've done in terms of picking back up the pace and turning things around.

Thanks for that color, Dan. Just one quick follow-up on ESR, if I could. Max, are you managing to 170 to 230, including the internal modeling benefits, or should I knock 30 points off of that until you get the FSA to approve those? In other words, is the real number for now 210, 210 plus, which would put you in the middle of your range, or are you still well in excess of your range that you're managing to? I just want to understand how you're thinking about that. Thanks.

Speaker 0

Yeah. The range is set based with our including of our U.S.P. The 170 to 230 includes the U.S.P., and that's what we obviously are managing towards.

Speaker 6

The next question comes from John Barnidge from Piper Sandler. Please go ahead.

Good morning. Thank you for the opportunity. My question is on the distribution for the Miraito cancer insurance product. Was it completely rolled out in totality by the end of Q2 2025 for all distribution that will be selling it?

Speaker 5

はい、えーと、お答えいたします。

Let me take that question.

え、これは販売展開しているということは、すべてのチャネルにという意味でしょうか。

Do you mean whether we are rolling out to all channels? This is to confirm your question.

Whether it's been rolled out to all channels that it's planned to be rolled out to by the end of the second quarter.

はい、はい、あの、答えはYesです。

The answer is yes to that question.

はい。えー、3月の17日に新商品発売しました。

We launched Miraito on March 17.

え、金融機関のチャネルと日本郵政グループ、これについては4月からの販売です。

For bank channel and Japan Post, we have started to offer this in April.

そうですか。だから、3月の17日と4月の1日ですべて販売は開始しております。

It is available at all channels now by launching in March and also in April.

Great. Thank you for that. My follow-up question is how do you think about the frequency with needing to refresh products now that you're trying to bundle products and solutions together? Is it an annual or every other year cycle? I'm asking maybe in relation to the product that you introduced in late last year that sold quite well. How should we be thinking about the refresh cycle for that?

はい、お答えいたします。えー、がん保険に関しては、サイクルは3年です。

For cancer insurance, the cycle is in three years.

で、医療保険はだいたい2年程度のサイクルになります。

Medical insurance, the refresh cycle is in two years.

金融庁認可が前提です。

The prerequisite is to get the FSA approval.

Speaker 6

The next question comes from Wes Carmichael from Autonomous Research. Please go ahead.

Hey, good morning. I had one follow-up on ESR again. Max, you confirmed on using the USP, this undertaking-specific parameter, and that adding about 30 points. Can I just get maybe a little bit of color on what that USP adjustment is and your view of the likelihood and timing of that? Separately, the internal model you mentioned, is that timeline a few years down the road, or how should we think about that?

Speaker 0

Yeah. Just to remind everybody, the USP gives an uplift of about 30 points. We do expect to have that approved by March 31, 2026, or very shortly thereafter. We think we're in very good shape in order to have all of those approvals done. That's why we feel confident that we can continue to manage and report out based on these metrics. As it relates to the full approval of our internal model, I think we will have something similar to the rollout of Solvency II, where it will take some time until that is the case. That is why we have chosen to, even though we obviously produce and we also use it for management decisions, our internal model today already, we will not report out on the internal model until that has been approved. I think we're quite some time away from that.

Got it. That's helpful. Maybe just a macro question on Japan, but we've obviously seen long JGB rates march pretty significantly higher this year, seen a bit of yen strengthening, even if that's reversed a little bit, I guess, more recently. Just curious overall, on your view of first-sector savings products in this environment, is the macro changing that, either at the margin or materially, your appetite to sell additional products outside of third sector?

Let me make a first comment, and then I'll let Aflac Japan also comment on it. Clearly, higher yen yields are good for our yen-denominated savings products, and especially at the long end of the curve. Keep in mind that what we are selling is a product that is priced off of the long end of the curve. A lot of the savings products that go into retirement accounts being sold by banks as the managers, etc., they price their products from the short end of the curve. With the steepening of the yield curve, it creates an advantage for life insurance companies to manufacture and sell long-duration yen-denominated products. From that standpoint, what we've seen recently in the market is beneficial for our products.

Speaker 5

アフラックジャパンの小出です。日本からもあのコメントをしたいと思います。

This is Masatoshi Koide speaking from Aflac Japan. Let Japan's side comment a little bit.

あの、金融市場はあの4月初旬に急激に円高、株安が進みましたけれども、ま、今は安定回復傾向に、ま、あります。

Financial markets are stabilizing and recovering from the yen's sharp appreciation, and stock prices declined in early April.

えー、あの、特に先月下旬に、ま、日米両政府で関税貿易交渉で合意に至った、あー、と公表された後には、ま、株価が史上最高値まで上昇するなど、ま、引き続き、あの、米国の、えー、関税を軸とする貿易政策に、え、関わる、ま、不確実性は、ま、上っています。

Additionally, after the late July announcement of the agreement reaching the U.S.-Japan tariff and trade negotiations, stock prices have risen to near-record heights. However, uncertainty related to U.S. trade policies centered on high tariffs continues.

ま、今後、輸出や世界的な制裁の影響が、ま、あの、徐々に明らかになっていく中で、ま、金融市場の再度急変の可能性も併せて、国内経済、ま、特に家計所得や消費マインド面への、ま、潜在的なリスクというのは注視していきたいと思っています。

As the implications for exports and global production become clearer, we will closely monitor potential risks to the domestic economy, particularly regarding household income and consumer sentiment, along with the possibility of further market volatility.

ま、資産形成商品への影響ですけれども...

As regards to the impact of Tsumitaz asset formation product.

ま、不透明でボラティリティの高い市場、市場環境というのは、円建てでかつ長期の固定利金率により安定的な資産形成を実現する、ま、ツミタツに対する先行というのは高まる可能性があると見ています。

With uncertainty and volatility in the markets, customers may look toward Tsumitaz, which offers stable yen-denominated long-term fixed-rate asset formation.

ま、そういう先行が高まれば、一方で競合の会社がツミタツと同様の商品を販売し、ま、競争が、あの、激化する可能性というのも、あの、あると...

This will also mean that this dynamic may drive competitors to consider offering similar products to Tsumitaz, which could contribute to increased competition.

ま、当社の金利、いー、であるとか、また他社の動向を、ま、継続的にモニタリングしながら、機動的に、えー、保険、えー、料率、うー、をですね、改定できる、ま、体制を構築しています。

We regularly monitor interest rate and competitive environment trends, and are prepared to revise premiums in an agile manner.

そうした非常に機動的な体制に基づいて、え、今回、えー、ツミタツの、えー、料率を、え、上げると、え、いうことを発表しましたけれども、ま、今後もこうした金融市場の動向を、え、注視しながら、あ、機動的に対応していきたいと思っています。

With this agility manner, we have decided to revise the premium rate for Tsumitaz, and we will continue to closely monitor the trends in the financial market and respond promptly as needed.

以上です。

That's all.

Speaker 6

The next question comes from Wilma Burdis from Raymond James. Please go ahead.

Hey, good morning. Was there any pause in U.S. sales due to the data breach that happened in the quarter? Thanks.

Speaker 0

Hey, this is Virgil. No, we saw no impact. We're not seeing anything material that comes to operational or to our financials. We are operational currently and continue to service our customers.

Thank you. Some of your competitors have reported higher claims due to the increasing cost of cancer treatments. Is it correct that Aflac wouldn't be exposed to this type of inflation due to the fixed-benefit nature of the product? Could this increase the attractiveness of the product given expensive but effective treatments are becoming more widely available? Thanks.

As you pointed out, we are primarily exposed to the frequency of cancer diagnosis, not necessarily the severity of treatments or cost of treatments that tend to fall on the primary insurance coverage that policyholders have. Our products are supplemental, and because we sell products with predefined benefits, with premiums that do not increase over the lifetime of the policy, that means that we are not necessarily exposed to the inflation risk and therefore the severity that some other insurance companies that sell other types of health insurance are seeing.

Speaker 1

One of the things that we do is when we revamp or change our new product, we take into account any new treatments that are out there to make sure we're paying for those particular treatments if possible, that are approved by the American Medical Association and whatever. As these new things are coming, we're updating our policies.

Speaker 6

them to buy it if they want to buy the additional coverage for that. That is very important, and that is how we go back and rework our accounts and add additional business to that by taking care of that. People ask me, "What if you find a cure for cancer?" My answer is, "They're finding cures every day for cancer." It is the treatment of those cures that we have to cover, and that is what we do in our business and want to continue to do going forward.

Speaker 4

The next question comes from Alex Scott from Barclays. Please go ahead.

Speaker 1

Hey, thanks for taking the question. I wanted to ask about the larger dividend out of Japan. It seemed more significant this quarter. I just wanted to see if any, you know, is there anything underlying that's kind of changing the dividend policy there, and does it have any impact on appetite for reinsurance the way that you guys have done towards the end of the year, and just decision-making around that?

Speaker 2

Yeah, Alex, there's really no change in either the appetite for reinsurance or dividend policy here. It's primarily a function of very strong regulatory FSA results, and we close the books for the fiscal year of 2025 on March 31, 2025. Because of those strong results, we then pay the final dividend in Q2 of 2026 as a function of that. It's really the function of very strong results that we had in the previous year on an FSA earnings basis.

Speaker 1

Got it. Okay, that's helpful. Maybe my last one on some of the things you're doing to invest in digitization in Japan. I was just being interested if you could comment a little bit more about that. You know, is that something that can be sped up just given, you know, I think there's more advanced tools using AI around some of the things you'd need to, you know, take policy forms and maybe digest them into a system, etc.

あ、アフラック・ジャパンのコイデです。

Speaker 5

This is Masatoshi Koide from Aflac Japan.

デジタルトランスフォーメーションには二つの領域があると領域で取り組んでいます。

We are working on the two areas under digital transformation.

一つはお客様の体験価値を向上させるという点です。

One area is to improve the customer experience of value.

これには様々なデジタルなサービスを新しく開発をして、お客様、そして代理店、それから社員という形でサービスレベルを上げるサービス、デジタルサービスを様々な提供しています。

We are providing various types of digital services to our customers, associates, and our employees.

これには生成AIの進化をしっかり今取り入れているところです。

Therefore, we're making sure to incorporate the new GenAI.

この生成AIを社内で社員が使っているだけではなく、代理店の一部にも提供して、代理店の仕事の効率性を、生産性を上げるのに大きく役立っています。

GenAI is making a great deal of contribution not only to our employees, but also to part of our associates, as they use this tool to improve their productivity.

それだけではなくて、ちょうど今月からお客様からの一般的な問い合わせに回答するデジタルヒューマンアバターのサービスを始めました。

Starting this month, we have begun to roll out the digital human avatar services to respond to part of our inquiries sent from our customers.

まだ一般的な問い合わせに対して、人間のオペレーターに代わって回答ができるというサービスですけれども、これによって三百六十五日、二十四時間お客様の問い合わせに答えることができるという点で、お客様へのサービスを体験価値を上げていくことになると考えています。

We believe this service will increase the overall customer experience or services, as this human avatar will be able to respond to customers' inquiries 24/7.

もう一つの領域はオペレーションをこのDXを最大限活用して効率化していくということです。

Another point is regarding the operation efficiency improvement by utilizing the DX.

特に契約管理業務については、業務が拡大するのに合わせて人を増やしていくという、そういう構造から、もうDXを最大限活用することによって、業務が拡大しても人が増えない、コストをかけずにDXで対応できるということによって、業務が拡大すればさらに効率性が上がると、そういう体制に向けて今プロジェクトで取り組んでいます。ここでも生成AIの進化を取り入れることによって、当初のプロジェクトからですね、前倒しで計画が進捗しています。

We are now moving ahead of our original schedule in terms of the implementation of the GenAI and its involvement. For the policy administration services, normally when the operation expands, we have to increase the resources or costs. However, along with the utilization of DX, even if the operation expands, we do not increase the people as the DX will do the job by itself. This will contribute to our cost reduction.

はい、以上です。

That's all from me.

Speaker 4

This concludes our question and answer session. I would like to turn the conference back over to David Young for any closing remarks.

Thank you, and thank you all for joining us today. We hope that you will reach out to us if you have any follow-up questions, and we look forward to talking to you then. Have a great rest of your day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.